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Bell Canada Takeover Is Blocked

OTTAWA — An appeals court quashed approval for the $51.8 billion leveraged buyout of Bell Canada on Wednesday after siding with angry bondholders in a ruling.

While the unanticipated decision may not be the final ruling on the buyout, the largest leveraged deal in history, it puts its future in legal jeopardy.

A five-judge panel of the Quebec Court of Appeal found that Canada’s largest telecommunications company “never attempted to justify the fairness and reasonableness of an arrangement that results in a significant adverse economic impact on the debenture holders while at the same time it accords a substantial premium to the shareholders.”

Because the buyout is structured under Canadian law as a “plan of arrangement” it requires court as well as shareholder approval. The new ruling sets aside court approval that was granted in early March.

“Everyone was telling us we didn’t stand a chance of winning this case,” said John L. Finnigan, one of the lawyers for the bondholders. “Now the deal has been killed. This plan of arrangement cannot go through.”

Within minutes of the release of the decision early Wednesday evening, Bell said that it would appeal to the Supreme Court of Canada and suggested that it would extend the current June 30 closing date for the deal.

“The judgment overturning the Quebec Superior Court decision rewrites Canadian law relating to the duty of Canadian boards of directors to maximize value for shareholders in the context of a change-of-control transaction, as well as to the entitlements of bondholders,” Martine Turcotte, the company’s chief legal officer, said in a statement.

In an e-mail message, Deborah Allan, a spokeswoman for the Ontario Teachers’ Pension Plan, which is leading the buyout group, said: “We’re reviewing the ruling and evaluating our options with respect to the bondholder claims. We remain committed to the transaction.”

Bell said that the closing date for the deal now depended on the supreme court’s willingness to hear the case and the timing of any hearing that could result.

The decision to take the company private disturbs bondholders because it will burden Bell with about 30 billion Canadian dollars in additional debt. That will most likely depress the price of current bonds because of concerns that a debt-laden Bell is a riskier investment.

In its decision, the appeal court noted that before agreeing to the buyout, Bell executives, including Michael J. Sabia, the president and chief executive, emphasized the company’s interest in maintaining a high credit rating.

Other recent developments have also raised questions about the deal’s viability. Last week a consortium of banks providing financing for the deal proposed substantial alterations to the terms of their loans to the purchasers, who also include Providence Equity Partners, Madison Dearborn Partners and Merrill Lynch Global Private Equity and the Toronto-Dominion bank, according to people knowledgeable about the deal.

The sweeping revisions sought by the banks, led by Citigroup, suggested to some investors and analysts that the banks were trying to escape the lending commitments, which they made last June, before the start of the current turmoil in credit markets.

The legal turmoil surrounding the case, if it continues for any extended period of time, might provide the bankers with at least an argument for walking away. Under the sale terms, Bell is required to resolve all regulatory issues and do its best to wind up litigation related to the purchase.

The widespread expectation among legal specialists in Canada had been that the appeal court would follow the trial judge’s lead and dismiss the bondholders’ complaint.

Shortly before the decision was released, Lionel David Smith, a professor specializing in commercial law at McGill University in Montreal, described the bondholders’ case as “an uphill battle.”

It is not clear if the supreme court will hear Bell’s appeal. Professor Smith said that some of the bondholders’ case was based on a legal concept known as oppression that is relatively untested by the high court in Canada.

Oppression cases have usually involved disputes between owners or shareholders of relatively small companies or partnerships, he said, and involved actions that, while legal, were outside of the partners’ or owners’ private understandings. The appeals court did not address the oppression arguments directly.

While Professor Smith said that it was quite possible that the supreme court would hear the case, that is not likely to happen before the deal’s deadline date.

Bell shares have been trading below the takeover price of 42.75 Canadian dollars. There is some hope in the investment community that Telus, the dominant telephone company in Western Canada, might make another attempt to acquire Bell if the private equity bid failed.

Telus looked at Bell last year but did not bid, apparently because of Bell’s reluctance to provide access to its internal financial data.

A purchase by Telus might also raise serious competition questions, particularly given that the government is now seeking to lure more operators into the wireless phone business, which is now split between Telus, Bell and Rogers Communications.